Use these five steps to beat a financial emergency and keep it from destroying your future
Financial emergencies happen to everyone. From sickness, runaway credit card debt and payday loan traps, there’s an endless number of financial disasters that can set you back and keep you from reaching your goals.
When they happen, how you react is critical to getting back on your feet.
Neglecting the problem and hoping it doesn’t happen again will mean you join the 40 million seniors living on less than $1,200 from Social Security in retirement. It also means spending your days until retirement dodging debt collectors and loan sharks.
Fortunately, beating financial emergencies isn’t just up to luck. You may not be able to totally avoid a financial emergency, but look to the five steps below and you can keep them from sending you to the poorhouse.
In fact, use these five steps to beat financial emergencies and you could bounce back from the next one in an even better financial situation than ever before.
Financial Emergency Fix #1: Understand What went Wrong
Most of the time financial emergencies happen at no fault of your own. Some of the worst financial set-backs are just going to happen.
- Loss of job
- Illness or injury
- You get sued
There are other financial emergencies that could have been avoided like letting debt pile up until it forces you into bankruptcy.
Whatever the cause, the first step to fixing your finances is just to understand what went wrong. C’mon, be absolutely honest. Were you a valuable employee or someone that the company was looking for an excuse to put on the chopping block? Were you spending way too much and it was only a matter of time before credit card payments became too much?
I’m not judging. I’ve had my share of financial-foolishness. From over-extending myself on rental property loans during the housing bubble to spending way too much on stuff I really didn’t need, I’ve had a few of my own financial emergencies.
What’s important is that you understand what happened to cause the financial crisis.
Financial Emergency Fix #2: Fixing the Problem
You wouldn’t paint your car before you fixed the breaks, would you?
You can’t get back on your feet after a financial emergency without first fixing the problem. Sure, you can start rebuilding your credit and saving for your goals but there’s a good chance that the same problem is going to happen again.
If the financial emergency was avoidable…then yeah, don’t do that again. It doesn’t mean you have to save every penny but set a budget you can keep and follow it.
If the financial crisis was out of your control, was there something you could have done to make it not quite as bad?
- Having enough health and life insurance is a must.
- Keep up-to-date with your job skills and consider taking a night class every once in a while to brush up. It will make you a real asset at work and unfireable.
Financial Emergency Fix #3: Rebuilding your Credit
Usually when a financial emergency strikes, it hits your credit score in a big way. You max out credit cards and take out loans to keep your head above water but it’s just too much.
The debt piles up and you end up missing payments. That only makes things worse because it means higher interest rates and even higher debt payments.
Fixing your credit can take a couple of years depending on how bad your credit score dropped. The Fair Isaac Corporation (FICO) reports that just one missed payment can drop your score by 30 points and an unpaid debt can send it tumbling by 100 points or more.
It took me four years to add 140 points back to my credit score after a debt disaster…and that’s actually pretty fast compared to how long it could have taken. Follow these three credit score hacks to fix your credit score fast.
- Use the debt snowball method to pay off your debt fast! List all your debt from smallest to largest and make extra payments on the smaller accounts first. This drops bills off your list fast which helps increase your credit score and is great motivation to keep going.
- Get negative remarks taken off your credit report. You can write to the credit reporting bureaus to ask that bad remarks get taken off your report. If the company that put the missed payment or whatever on your report doesn’t respond to your complaint, it gets taken off the report.
- Consider paying off your high-interest credit card debt with one debt consolidation loan from PersonalLoans or Lending Club. Consolidating your debt works on a couple of different levels. First, it makes it easier to manage your bills because you have just one payment rather than many. It also can lower your bills by lowering your interest rate and the money you pay on each debt.
Financial Emergency Fix #4: Saving for a Stormy Day
The saying goes that you should have at least three months of expenses in a savings account for when a financial emergency strikes. That can mean upwards of $10,000 for a lot of families and may not be realistic.
Try saving at least $1,000 for your ‘rainy day’ money. A survey by the Federal Reserve found that half of Americans wouldn’t be able to come up with $400 if an emergency struck so even $1,000 is going to put you way ahead of most people.
Spending your emergency savings isn’t for Christmas shopping or when the bills are a little higher in any particular month. This is money only for true financial emergencies. If you’re having trouble with monthly bills or saving a little extra for holiday spending, go back to your regular monthly budget and cut where you can.
Sticking your emergency money in a savings account will actually mean losing money every year against inflation. Try investing your emergency fund in safe investments to help grow it a little but keep it safe.
Financial Emergency Fix #5: Being Financially Stronger
Once you’ve built up an emergency fund of a couple thousand, you’re ready to build your financial future where you won’t have to worry about financial emergencies.
This means going beyond just ‘getting by’ to really putting yourself on track to meet your goals and creating standard of living you deserve.
I’ve spent my career helping people invest their money and started an investing blog last year to share some of the investing basics that helped me create a portfolio into the hundreds of thousands. Check out the blog and one of the best investing tools I’ve found to save money in the stock market.
While a lot of people live paycheck-to-paycheck, there are also those that don’t worry about financial emergencies. They’ve used the five financial fixes above to get back on track and get out ahead of a financial mistake. That way, even if you can’t keep a financial crisis from happening, it won’t keep you down for long.